Weekly Commentary: 20 December 2021 – 26 December 2021
All of the major indices delivered negative returns last week. Growth stocks as loosely represented by the NASDAQ Composite fared worst as it slipped by 2.94%. The S&P 500 and the DJIA were not far behind as they both had a decrease of 1.91% and 1.67% each. Both the STI and Hang Seng slipped by 0.57% and 3.34% respectively. All the S&P 500 sectors had weekly returns in the red as well with the exception of the top three performers – Healthcare (+1.57%%), Real Estate (+0.45%), and Utilities (+0.03%). In the other hand, InfoTech (-2.45%), Energy (-2.38%), and Consumer Discretionary (-1.89%) were the lagging sectors for the week.
The stock market has shifted in favor to the more defensive sectors as investors’ sentiment are being dominated by rising inflation and growth uncertainty brought up by the Omicron variant. The Consumer Price Index published monthly by the U.S. Bureau of Labor Statistics (BLS) indicated that the inflation rate by the end of November has increased by 0.6% to reach 6.8%, the highest since 1982. Many are fearing that this will force the Fed’s hands in raising benchmark interest rate at a faster pace as high inflation usually demands an increase in interest rates and this is not good news for stocks that had been valued very generously. The market reacted positively for a short while after the Fed’s meeting last week, due to no imminent rate hikes for now. But the Fed had stated that it would cut back on its bond-buying faster and would be making three interest rate increases next year. Central banks across the globe such as Bank of England and Russia, had also started to raise interest rates in an effort to tame inflation despite the looming threat posed to economic growth by the Omicron variant. Bank of England raised its benchmark rate to 0.25% from 0.1% while Russia raised its key interest rate by 100 bp to 8.5% on Friday. It had hike the rate seven times this year from a record low of 4.25%.
The yield-curve flattened last week as both the U.S. 2-year and 10-year Treasury yield dropped by 1 bp and 8 bp to reach 0.64% and 1.40% respectively. The 10Y-2Y US Treasury yield spread tightened to 0.76%. Stock market sentiment was quite weak as the global HY-IG spread further contracted by 4 bp to 2.10% while the CBOE Volatility Index (VIX) increased by 288 bp to 21.57%, both are lying slightly above their 50-day exponential moving average of 2.08% and 20.37%.
As can be seen below, the global REIT markets reported mixed returns overall, with Australia, Japan, US, Canada, and France delivering weekly returns in the positive range. The overall 12-month yield spreads remained positive and still favorable towards REIT’s forward total return. Back at home, the iEdge S-REIT Index slipped by 0.79% with two sectors that held up the best being Retail (-0.59%) and Diversified (-0.52%). Currently, Office and Diversified offered the best room for growth. Both have the best average yield of 5.5% to 6% respectively among all the other S-REIT sectors while being quite fairly valued in terms of Price-to-Book or Price-to-NAV. The underperforming sectors in the other hand, were Hospitality (-1.76%) and Industrial (-0.59%).
Back at home, Singapore has reported a total of 24 Omicron case. The Omicron variant had brought in a new wave of the pandemic and saw many countries tightening their restrictions to curb the spread last week. So far, more than 50 countries have stepped up border controls to slow the spread and Singapore had also stopped all new vaccinated travel lanes (VTLs) destinations and relaxation on social measures. The VTLs launch with Qatar, Saudi Arabia and the United Arab Emirates are currently deferred until further notice. Virus development will need to be closely observed in order to identify the right time for a recovery play as the new variant will likely delay the pace moving forward. In a positive note however, the pandemic situation is stabling and we saw a decrease in infections as the 7-day moving average of total COVID-19 cases fell to 422 from 645 the previous week.
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